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Episode Date: August 21, 2014
https://youtu.be/rDrsofl-_xc
In this "Startup Basics," Jason sits down with special guests, WSGR attorneys Rachel Proffitt and Todd Carpenter, who give us in-depth advice on the legal aspects of getting your startup off the ground. In this episode, Todd and Rachel address the following critical question: If I'm starting a tech company, what type of corporation should I make -- an LLC, S-, or C-corp? Tune in to find out!
Top Insights
- One of the conditions to getting funded by VCs is being a C-corp. This is for tax reasons and their LPs often prohibit them from investing in other types of corporations.
- A lot of really smart private equity funds require companies to be LLCs.
- Delaware C-corps are easy to set up and cost-effective, while an LLC is a contract-based situation. Everyone in an LLC agreement is uniquely crafted for that entity. You can pull off-the-shelf agreements during LLC setup, but they probably won't work perfectly. It's more expensive to properly set one up.
- Getting funded is hard. Don't limit your options by forming your company the wrong way.
If it's worth doing, do it right. - Jason
- Easy short answer: set up a Delaware C-corp.
- It's very company-specific. The type of corporation you should choose depends on the type of business you're working on.
- LLC and S-corp are flow-through tax entities, which means that you avoid a level of corporate tax.
- S-corp and C-corp are largely the same, other than the tax treatments in a filing that you need to make to elect affirmatively to be an S-corp.
- S-corp doesn't mean "small" corporation. It's just an election under the tax code. It doesn't have to be a small company, but there are restrictions on what types of shareholders and the number of shareholders you can have. It's prohibitive to do that if you're going to be a Silicon Valley company.
- Conversion to a C-corp from LLC or S-corp can be cost-prohibitive at times, like when you're only raising a small amount of money.
- The longer you take to convert, the more costly and complicated it gets.